Despite low interest rates and a generally stable economic environment, the period 2010-2019 was marked by the slowest growth among mid-sized companies and a continued deterioration in their financial performance. It may have to do with the winner-take-all economy of the past decade. Bankruptcy filings show that the pandemic has worsened this trend. It has never been more important for midsize businesses to understand that a booming stock market does not accurately reflect the reality of most American businesses.
When the Covid-19 pandemic struck, a record number of companies, many of which had survived for more than 50 or even 100 years, had no choice but to file for bankruptcy. Recent trends do not bode well for the mid-sized companies that are the backbone of any national economy.
We used a database approach to show the current plight of mid-sized companies and looked at the recent period from 2000 to 2019, culminating with the pandemic year 2020. We defined mid-sized companies as those in the mid-range. 40% of all companies listed on the US stock exchanges. by market value and identified them on an annual basis based on their market value at the end of the previous financial year. (The top 30% and bottom 30% are classified as large and small, respectively.)
Data suggests that a perfect storm is brewing for midsize businesses over the past 50 years. In each successive decade since 197079, the annual growth rates of assets, sales and profits have declined for medium-sized firms, which find it increasingly difficult to make a profit.
To show the trend of slower growth, we calculated the year-over-year percentage growth rates of three financial metrics: sales, assets, and profits for each mid-sized company. Sales are the highest number in tax returns and indicate the size of the market for the company’s products and services. Sales growth indicates whether the business of the business is growing or shrinking. Asset growth shows whether the business is increasing or decreasing its total resource deployment. Profits are the final figure in the income statement and indicate whether the company generates a net surplus in its operations. This surplus is used to finance further growth and pay dividends to shareholders.
We calculated the annual percentage growth rate of these three financial metrics for each mid-size business and year. We then calculated their medians for the decades 19701979, 19801989, 19901999, 20002009 and 20102019. For 20002009, we suppressed the years 2008 and 2009 due to the great recession. We calculated the medians because, unlike the averages, the medians are not affected by extreme business performance. The results are shown in the following figure.
The figure shows that the growth rate of each of the three measures has declined over the past 50 years and was lowest during the decade 2010-2019, although these periods have been characterized as a decade of economic recovery. The past decade has shown an increase in population, falling interest rates, growth in hourly wage rates and household income, improved educational attainment and growth in GDP. These factors can be expected to have enabled rapid business growth, but this growth appears to have bypassed mid-sized businesses.
It is difficult to determine the exact reason why midsize companies have not benefited from the economic advances of recent decades, but we offer a few hypotheses. One plausible reason is that companies that could scale their virtual operations without the need for physical assets have benefited the most from technological advancement and economic conditions. As a result, digital disruptors like Amazon, Airbnb and Uber have hurt the growth and margins of midsize businesses. Amazon needed a large infrastructure, but it could integrate seamlessly between physical and virtual platforms, disrupting many businesses simultaneously. In contrast, mid-sized businesses, especially those like hotel chains and retail stores that operate with physical assets and infrastructure, lacked not only the dynamism of small businesses, but also the capacity to invest in them. R&D and scaling up of large companies. Additionally, the past decade has been a winning economy, with big companies like Amazon and Apple growing bigger and bigger. We have shown previously that the economic fallout that has arisen since the 2008 financial crisis has largely fallen to large companies.
In 2019, we described the evolution of the market values of mid-sized companies. The new statistics we present in this article highlight the struggles of mid-sized businesses over the past decade. During the 2010-2019 period, 39.8% of mid-sized companies reported a loss, 33% reported year-over-year sales declines and 47% annual profit declines. After removing the influence of outliers, the average profit / price ratio was negative at 3.86%. The average return on assets is also negative at 2.36%. The median change in return on equity, a measure of return on shareholder value, was negative 4.04%. These results indicate that mid-sized companies have struggled more and more over the past decade despite stable economic conditions conducive to growth.
What happened between 2010 and 2019 did not bode well when the pandemic hit in 2020. We do not yet have financial reports for fiscal year 2020 as it usually takes three months to prepare and verify financial statements. before they are reported. However, we have another indicator of financial distress: the number of bankruptcies filed by medium-sized companies. For this information, we rely on the UCLA-LoPucki Bankruptcy Research Database, which tracks bankruptcies filed by companies with assets exceeding $ 100 million in 1980 dollars (approximately $ 310 million in 1980 dollars). ‘today). The database also includes economically important mid-sized companies. The following figure shows a trend in the number of mid-sized companies that filed for bankruptcy between 2010 and 2020.
The highest number of annual bankruptcy filings between 2010 and 2019 was 32 in 2016, and the median and averages over the decade were 11 and 13.2, respectively, per year. That number rose to 43 in 2020, an increase of 226% from the annual average and an increase of 291% from the median. These figures are based on data up to November 2020 if data for December 2020 had been included, the picture would be even more striking.
These businesses include well-known retail stores like JC Penney, Pier 1 Imports, Tailored Brands (brands like Mens Wearhouse and Jos. A. Bank) and Ascena Retail (brands like Ann Taylor and LOFT). Other large industrial groups declaring bankruptcy included oil and gas companies, such as Gulfport Energy; accommodation and entertainment companies, such as Marcus Corporation; and travel companies, such as Hertz. Bankruptcy filings would have been even higher without the US government’s $ 2.2 trillion stimulus package, which included $ 500 billion for state-owned companies.
Each business follows a different path to recovery. Consider the results of a few companies that have been around for over 50 years. 120-year-old retail pioneer JC Penney has been sold to Simon Property Group and Brookfield Asset Management. Likewise, century-old engine maker Briggs & Stratton has entered into a deal with a private equity firm to take over all of the company’s assets. Car rental giant Hertz is selling 180,000 of its approximately 500,000-car fleet while borrowing an additional $ 1.65 billion in new financing, which will add to its existing $ 19 billion debt. In addition, it is changing its business model by offering an all-inclusive premium maintenance, liability and roadside assistance package for a fixed monthly subscription. McDermott International Ltd., 80, which provides engineering and construction services for the energy industry, came out of bankruptcy by selling its assets and paying off about $ 4.6 billion in debt.
In summary, despite its low interest rates and stable economic environment, the past decade has witnessed the slowest growth among mid-sized companies and continued deterioration in their financial performance. As the bankruptcy declarations show, the pandemic shock worsened this trend, shaking their major companies that had survived harsher economic shocks over the past century. Executives of midsize companies need to understand that the booming stock market does not accurately reflect the reality on the ground for most US companies.
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